Determinants of a digital start-up's access to VC financing in India: A signaling theory perspective

Abstract

In recent years, the increased emphasis on digitalization aided by advancements in technology has led to the growth of digital startups. Considering the enhanced uncertainty in the lifecycle of a digital startup and their high failure rates compared to non-digital startups, access to VC financing is a crucial element that influences their survival and scale-up. Leveraging signaling theory in unique ways and using a two-stage financing model, we analyze a sample of 124 digital startups in India and find that during the selection stage, the founders' perception of VCs' ability to contribute non-financial value-added services influences their decision to seek VC financing. But at the decision stage, signals emanating from younger stage entrepreneurs with an education pedigree from premier institutes, startups that are incubated in an incubator or are part of an accelerator program, or those building businesses focusing on digitally enabled business models, are likely to be valued highly by VCs and therefore have a higher likelihood of receiving VC financing. Yet much remains to be done by the policy makers in India for those who do not fall within this spectrum to stimulate the growth of digital startups in the country.